China, Apple’s greatest hope, is also most perplexing challenge

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FILE – In this Oct. 20, 2012 photo, people line up to enter a newly-opened Apple Store in Wangfujing shopping district in Beijing. Exxon has once again surpassed Apple as the world’s most valuable company after the iPhone and iPad maker saw its stock price falter, according to reports Friday, Jan. 25, 2013. Apple first surpassed Exxon in the summer of 2011. The two companies traded places through that fall, until Apple surpassed Exxon for good in early 2012. (AP Photo/Andy Wong, File)

Even as Apple (AAPL) enjoys breakneck growth in China, recent tongue-lashings from government-controlled media show the company faces perils in the country crucial to spur its global sales.

The media criticism, a new lawsuit by a Chinese company asserting Apple copied its software to develop the iPhone’s and iPad’s “Siri” personal assistant, and growing pressure from Samsung as the purveyor of tech cool in the world’s second-largest economy underscore the Cupertino company’s challenges.

“China has never been easy,” said independent wireless analyst Chetan Sharma.

The new media scrutiny and more assertive legal challenges from Chinese companies reflect the broader pursuit of the “Chinese Dream,” as advocated by newly installed President Xi Jinping, that emphasizes local innovation and brands.

“There seems to be this targeting of Apple,” said Anna Han, a Santa Clara University business law professor who advises U.S. companies operating in China. “But this is going to happen to all U.S. companies in China.”

Apple has come under government scrutiny in China at a time when it is encountering stiff competition from Samsung, now the smartphone leader in that country, for the hearts and wallets of wealthy Chinese anxious to buy the latest status-symbol product. CEO Tim Cook must craft a careful strategy for China, where hundreds of millions of potential consumers with modest incomes would eagerly buy cheaper versions of the iPhone, a move that would boost market share but threaten Apple’s premium brand.

Cook also is involved in tough negotiations with China Mobile, which has some 700 million subscribers and is aggressively promoting Samsung devices, to carry the iPhone, a process that has stretched on for years.

The stakes are huge for Apple, which has boasted explosive growth in China. During the company’s first quarter, revenues for Greater China, which includes mainland China, Hong Kong and Taiwan, jumped 67 percent from the year-ago period to $6.83 billion, Apple reported in January.

But its success is placing the company in the cross hairs of officials seeking to dim its reputation and of local companies eager to protect their patents or cash in through lawsuits, Han said, in a judicial system where they enjoy “home court advantage.”

On Wednesday, Apple’s lawyers appeared in a Shanghai court, where a Chinese company accused it of copying its software for the “Siri” personal assistant. Last year, Apple paid $60 million to Chinese computer maker Shenzhen Proview Technology to settle a legal dispute over the “iPad” trademark.

The latest court hearing came on the heels of Monday’s criticism of Apple by the People’s Daily, the Communist Party’s flagship newspaper, which lambasted the company for not adequately responding to warranty complaints raised by an earlier broadcast on CCTV, the government-run television network. The news report suggested the Cupertino company treats consumers in China differently than it does customers in other countries. It was also critical of Apple’s warranty policies.

During the weekend, Apple posted a message on its Chinese website saying it provides a 90-day warranty on repairs — just like in the United States — longer than the 30 days mandated by law in China.

The media attacks on a foreign company help deflect criticism of some Chinese companies after scandals such as the sale of tainted milk or the recent dumping of 16,000 dead pigs in a river that supplies drinking water to Shanghai, said Shanghai-based Shaun Rein, founder of China Market Research Group.

“They are trying to chip away at foreign companies and their reputations to say it’s not just Chinese brands that have problems,” said Rein, author of, “The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World.” “They are going after the best-of-breed foreign brands.”

But Stanford University professor Hau Lee, a guru of supply-chain management, said the growing criticism of foreign brands may be part of a new government effort to protect consumers and give them more confidence to buy products.

“They are actually giving more rights to the consumers, and the Chinese government has encouraged more transparencies in the supply chain,” Lee, who is traveling in China, said in an email.

The recent criticism of Apple, though, was viewed as ham-handed by many Chinese, who went online to mock the media reports.

“No one takes seriously the news from CCTV, at least no professionals,” said Linda Jiang, vice president of business development of Umeng Analytics Platform, a Beijing-based mobile app and analytics service.

Apple’s biggest problem in China is fine-tuning its strategy for a market that is very different from the West, said Duncan Clark, chairman of BDA China, a Beijing-based investment and strategy consultancy. Apple needs more models of differing sizes, such as Samsung offers, he said.

Clark pointed to Samsung’s Galaxy Note line, devices with five-inch screens that act both as tablets and phones, and have been nicknamed “No Face” in China because they hide the user’s face. They are now popular among trendy young women, he said.

While Apple remains a coveted brand in China, it is increasingly sharing the spotlight with Samsung, whose phones are popular among professionals, Rein said. Apple needs to expand its retail presence — there are now eight stores in China, far short of the 25 it had planned to have open in the country by the end of 2011 — and “launch new and better products,” he said.

A deal with China Mobile would help Apple blunt Samsung’s advances, Rein added. He believes Apple and China Mobile need a partnership more than ever. China Mobile is being challenged by the new free mobile phone text and voice messaging service WeChat developed by Tencent. Adding the iPhone to its network would juice revenues, he said.

“They both are facing massive challenges,” Rein said of Apple and China Mobile. “So they need to cooperate.”

Contact John Boudreau at 408-278-3496; follow him at Twitter.com/svwriter.

Patrick May is an award-winning writer for the Bay Area News Group working with the business desk as a general assignment reporter. Over his 34 years in daily newspapers, he has traveled overseas and around the nation, covering wars and natural disasters, writing both breaking news stories and human-interest features. He has won numerous national and regional writing awards during his years as a reporter, 17 of them spent at the Miami Herald. In 1993, Pat shared with his colleagues a Pulitzer Prize for Public Service for the Herald staff's coverage of Hurricane Andrew and its aftermath.

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